A lot of people believe that credit cards are the devil and that they lead towards an inevitable spiral into debt and bad credit. This is very much the case for some people, but for those that are responsible, the opposite holds true. A credit card is a tool. If you understand how it works and when to use it, your life will become easier.
To start, I will provide two examples of typical, but incorrect use of credit cards.
First, let’s say that I am the type of person that believes that credit cards are the devil so I only use my debit card and cash for purchases. I definitely have at least one credit card, but it’s only for emergencies. In this situation I am personally losing value on my dollar, and instead, giving that value to the merchant that I am paying. Here’s how:
- You get 0% back when paying with cash or a debit card.
- A debit card typically costs a merchant less than one dollar in fees to process.
- A credit card costs a percentage of the purchase to process.
- Using a credit card, even if the spend is non-bonus spend for that particular card, will get you, the consumer, an absolute minimum of 1% back.
As you can see, cash users subsidize rewards for credit card users. The extra money saved when a consumer uses cash allows the merchant to eat the fees associated with processing credit cards.
Your credit score may take a hit from letting your card stay dormant as well because of the following:
- Card issuers occasionally close inactive cards.
- Utilization makes up roughly 30% of your credit score and a 0% utilization rate is viewed negatively by credit bearueas.
In this situation, due to the lack of consistent activity on your cards, the banks may close it and it may not be available to you in an emergency.
The second situation is a person that loves credit cards and constantly puts more than they can afford on them. This type of usage will lead to the following issues:
- A low credit score to a utilization likely higher than 10%
- Credit cards have unbelievably high rates, typically in excess of 20%. By carrying a balance month to month, you will be digging yourself deeper and deeper into debt.
- This type of person will likely be living paycheck to paycheck and may eventually need to declare bankruptcy.
Situations like the above example are what has led to the negative connotation that people have about credit cards.
If neither of the above examples apply to you, then congratulations, you have an open mind and are responsible enough to take the next steps! As with anything in life, these first few posts will be preparing you with knowledge before taking action.
The next step is to dispell the myths surrounding credit cards. Once we build up a strong basis of knowledge about different hard and soft rules for this hobby, I’ll get into how to apply for cards and what order you should do things in. You can check out my next post if you’re ready to fall down the rabbit hole!
Credit Card Myths and General Info